Choose the correct answer: (Also provide reasons for incorrect options) Tropical Fruit Drinks issued $10,000,000 in bonds to expand its production facilities. After issuing the bonds, the company was 60% debt financed and 40% common equity financed. Tropical intends to retire 20% of the bonds each year for the next five years and not to issue any new debt. Options- a. All things equal, we would expect Tropical Fruit Drinks cost of capital to decrease gradually over the next five years. b. All things equal, we would expect Tropical Fruit Drinks cost of capital to stay the same for the next five years, then decrease rapidly. c. All things equal, we would expect Tropical Fruit Drinks cost of capital to stay the same for the next five years, then increase rapidly. d. All things equal, we would expect Tropical Fruit Drinks cost of capital to increase gradually over the next five years.
Choose the correct answer: (Also provide reasons for incorrect options)
Tropical Fruit Drinks issued $10,000,000 in bonds to expand its production facilities. After issuing the bonds, the company was 60% debt financed and 40% common equity financed. Tropical intends to retire 20% of the bonds each year for the next five years and not to issue any new debt.
Options-
a. All things equal, we would expect Tropical Fruit Drinks cost of capital to decrease gradually over the next five years.
b. All things equal, we would expect Tropical Fruit Drinks cost of capital to stay the same for the next five years, then decrease rapidly.
c. All things equal, we would expect Tropical Fruit Drinks cost of capital to stay the same for the next five years, then increase rapidly.
d. All things equal, we would expect Tropical Fruit Drinks cost of capital to increase gradually over the next five years.
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